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ARCH GARCH Assignment

This paper gives a brief idea about the arch garch model of econometrics and contains an analysis of how to perform it.

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Sruti Suhasaria
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85 views8 pages

ARCH GARCH Assignment

This paper gives a brief idea about the arch garch model of econometrics and contains an analysis of how to perform it.

Uploaded by

Sruti Suhasaria
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ADVANCED ECONOMETRICS-ASSIGNMENT 6

ARCH/GARCH Model

Sruti Suhasaria
212pge020

Introduction:
The autoregressive conditional heteroscedasticity (ARCH) model is a statistical
model for time series data that describes the variance of the current error
term or innovation as a function of the actual sizes of the previous time
periods' error terms.
The generalized autoregressive conditional heteroscedasticity (GARCH) process-
is an econometric term used to describe an approach to estimate volatility in
financial markets.
Data & Methodology:
The data used in this assignment is a time series data of ICICI Prudential Life
Insurance Company Ltd from finance industry which was extracted from
website Yahoo Finance WIPRO where I have used NSE’s real time price and
found the independent variable OPEN.
Result & Interpretation:
The first step is to find which series this data set belongs to through the ADF
test:

ADF Test:
Null Hypothesis: D(OPEN) has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=15)

t-Statistic   Prob.*

Augmented Dickey-Fuller test statistic -14.50214  0.0000


Test critical values: 1% level -3.995800
5% level -3.428198
10% level -3.137485

Here, we reject the null hypothesis and find that the dataset is an I (1) series.
But, then we cannot model an I (1) series using GARCH model as our dataset
should be stationary.
Hence, an open return must be created using log, and we get the below graph
which clearly indicates it is a stationary series.

To check volatility of Log Open:

1. To check ARCH effect- (using Least Square method) –The heteroscedasticity


test:
Null hypothesis (Ho): There is no ARCH effect
Here, the p-value is less than 0.05, so we reject the null hypothesis.
Therefore, we can say that there is an ARCH effect as the p-value is less than
0.05.

2. To model mean & variance, we use the ARCH/GARCH model due to the
presence of an ARCH effect-

A) We estimate the equation first, by putting ARCH-1 & GARCH-0

From the above table we see that in the Variance equation the ARCH term is
INSIGNIFICANT.
B) Now, we add the GARCH term-

And see that the GARCH term too is INSIGNIFICANT


C) Now by putting the ARCH, GARCH and the threshold order as 1:

This too is INSIGNIFICANT.


D) Now, trying ARCH-M and using

Standard Deviation

Variance
Log(VAR)

All the above are INSIGNIFICANT.

E) Now, by trying E-GARCH and removing the GARCH term and by adding an
Asymmetric term in the equation it was seen that the absolute of the residuals
is SIGNIFICANT.
F) Now, by coming back to the GARCH model and adding abs(resid) to the
variance regressors and keeping only ARCH value

Here we see all values to be SIGNIFICANT.


Conclusion:

GARCH Variance Series:

Here we see that since all the values are above zero and positive, we can use
the GARCH model for this time series dataset.

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